Quick Facts

Malaysia’s economic freedom score is 70.8, making its economy the 31st freest in the 2015 Index. Its score has increased by 1.2 points since last year, with improvements in freedom from corruption, business freedom, and trade freedom outweighing declines in labor freedom and the management of government spending. Malaysia is ranked 8th out of 42 countries in the Asia–Pacific region, and its overall score is above the world and regional averages.

Malaysia has risen to the “mostly free” category. Since 2011, its economic freedom has advanced by 4.5 points, the third largest point increase in the Asia–Pacific region. Gains in six of the 10 economic freedoms have been led by double-digit increases in investment, financial, and business freedoms.

A relatively open economy, Malaysia is a vital part of the East Asian manufacturing network. The business environment encourages the development of a vibrant private sector. Malaysia scores well in the area of open markets measured by trade freedom, investment freedom, and financial freedom compared to the global averages. The financial sector is robust, and foreign investment is being permitted to a greater degree. While the rule of law remains weak, the government has taken steps to tackle corruption more effectively.

Background

The United Malays National Organization (UMNO) has ruled the ethnically and religiously diverse constitutional monarchy of Malaysia since independence in 1957. Dissatisfaction with pro-Malay affirmative-action programs and corruption generated important opposition gains in the March 2008 elections. In the 2013 elections, the UMNO-led coalition retained power but failed for the first time to win more than 50 percent of the popular vote. The government maintains investments in such key sectors as banking, media, automobiles, and airlines. In 2014, a Malaysia Airlines plane was lost in the Indian Ocean, and another was shot down in Ukraine. Malaysia is a leading exporter of electronics and information technology products; other industries include agricultural products and automobiles.

The continuous 50-year hold on power by the United Malays National Organization and the other parties in the ruling coalition, government favoritism, blurred distinctions between public and private enterprises, and the imperfections of the bureaucratic system have encouraged the perpetuation of corruption in political and economic life. Judicial independence is compromised by extensive executive influence.

Malaysia’s top individual income tax rate is 26 percent, and its top corporate tax rate is 25 percent. Other taxes include a sales tax and a capital gains tax. Overall tax revenue amounts to 16.1 percent of domestic income. Government spending amounts to 29.5 percent of the domestic economy, and public debt is equal to 58 percent of gross domestic product.

The regulatory framework generally facilitates entrepreneurial activity. With no minimum capital required, incorporating a business takes three procedures. Relatively flexible labor regulations support the development of an efficient labor market. In 2013, the government cut fuel subsidies and later hiked electricity tariffs to reduce budget deficits. Other economically distortionary subsidies and price controls remain in place.

Malaysia’s average tariff rate is 4.0 percent. Malaysia has benefited from unilateral tariff cuts and trade agreements that have reduced trade barriers. Foreign investment in many economic sectors is capped. Measures to open the financial sector to greater competition have been implemented, but state-owned enterprises retain sizable shares in the banking sector, including the two largest banks.